Financial Management and Strategic Management · Types of Financing

Innovative and International Sources of Finance for CA Inter

Updated 4 October 2026 · Fact-checked

These are ways a company raises money outside plain domestic equity and loans: ADRs and GDRs (depository receipts), ECBs (foreign loans), FCCBs (foreign convertible bonds), masala bonds (rupee bonds abroad), securitization and zero coupon or deep discount bonds. Solve questions by defining the instrument, stating features, then listing advantages and limits.

Understand Innovative and International Sources of Finance

Companies need money beyond what banks and the local share market give. International and innovative sources widen the pool of investors and often lower cost or match cash flows better. This topic is mostly theory, so you must know each instrument's meaning, features and risks.

Depository receipts let a company's shares be traded abroad without the foreign investor holding the shares directly. The company's shares are deposited with a custodian in its home country. A foreign depository bank issues receipts against them. An ADR (American Depository Receipt) is issued for the US market and is traded on US exchanges. A GDR (Global Depository Receipt) is issued in more than one country, or outside the US, and is traded on exchanges such as London or Luxembourg. The investor gets dividends (paid in foreign currency) and price gains, and the company gets foreign capital without listing its shares abroad directly.

Debt routes from abroad. An ECB (External Commercial Borrowing) is a commercial loan raised by an Indian entity from a non-resident lender, such as a bank loan, a bond or a supplier's credit. It is governed by RBI and FEMA rules on eligible borrowers, end-use, maturity and cost. An FCCB (Foreign Currency Convertible Bond) is a bond issued abroad in foreign currency that pays interest and can be converted into the issuer's shares. Interest is usually lower than on a plain bond because the investor also gets the conversion option. A masala bond is an Indian rupee-denominated bond issued outside India. The investor, not the issuer, carries the currency risk, so the issuer is not exposed to rupee depreciation on repayment.

Securitization turns illiquid assets with predictable cash flows (loans, receivables, mortgages) into tradable securities. The originator sells a pool of assets to a Special Purpose Vehicle (SPV). The SPV issues securities to investors and pays them from the cash collected on the assets. The originator gets cash now, moves the assets off its books and can lend again.

Zero coupon and deep discount bonds pay no periodic interest. A zero coupon bond is issued at a discount and redeemed at face value. A deep discount bond is issued at a very large discount, often with a long maturity, and redeemed at a higher value. The return is the gap between issue price and redemption value. The issuer saves cash during the life of the bond, but must pay the full amount at maturity.

Key rules to remember

Return on a zero coupon bond (approximate yield): Issue price = Redemption value ÷ (1 + r)ⁿ; Solve for r to find the yield. Use this to price or compare a zero coupon or deep discount bond.
ADR vs GDR rule: ADR = US market, listed on US exchanges; GDR = other markets, or more than one market; State this contrast first in any difference question.
Securitization chain: Originator → sells asset pool → SPV → issues securities → investors; collections → investors; Write the flow in this order to earn process marks.
FCCB conversion value: Conversion value = Number of shares per bond × Market price per share; Compare with the bond's redemption value to judge whether conversion is worthwhile.

How to solve Innovative and International Sources of Finance questions

Use this method for a theory question or a short numerical question on these instruments.

1Read the instruction word: explain, differentiate, discuss or state advantages. It decides your format.
2Define the instrument in one or two lines: who issues it, in what currency and where it is raised.
3State key features: the parties involved, currency, whether it is debt or equity and any conversion option.
4Give advantages to the issuer, then limitations or risks such as currency, regulatory or cost risk.
5For a difference question, write point-by-point contrasts on basis such as market, issuer, currency, listing and nature.
6For a numerical question, write the formula, substitute values, compute and then add a one-line interpretation.
7Close with a short conclusion that links the instrument to the company's need.

Quickest way: Definition, features, pros, cons

When to use it: Use it in the 70-mark written part for any theory question, and for elimination in MCQs.

For MCQs, spot the key word: US means ADR, rupee-denominated abroad means masala bond, convertible foreign bond means FCCB, SPV means securitization, no periodic interest means zero coupon.
Eliminate options that reverse the currency risk. Masala bond risk sits with the investor.
In written answers use four labelled parts: meaning, features, advantages, limitations. Examiners award marks per point.
For difference questions, write a two-column style using lines such as ADR: ... and GDR: ... for each basis.
For bond yield sums, set up Issue price = Redemption value ÷ (1 + r)ⁿ and show each step.

Common mistakes in Innovative and International Sources of Finance

Saying a GDR can only be listed in London or that an ADR can be listed anywhere.
Students memorise example exchanges rather than the rule.
Fix: Remember ADR is for the US market. GDR is for other or multiple markets. London is only an example.
Writing that the issuer bears the currency risk on masala bonds.
Students assume all foreign bonds work like foreign currency bonds.
Fix: A masala bond is rupee-denominated, so the investor bears the exchange rate risk.
Treating FCCB as plain debt with no equity feature.
The word bond hides the conversion option.
Fix: Always mention conversion into shares, the lower coupon and the possible dilution of existing shareholders.
Missing the SPV in a securitization answer.
Students describe it as simply selling loans.
Fix: Show the originator, SPV, pool of assets, securities issued and cash flow back to investors.
Saying zero coupon bonds pay no money to the investor at all.
No interest is confused with no return.
Fix: The return is the difference between the discounted issue price and the redemption value, paid at maturity.

Worked examples

Example 1

Differentiate between ADR and GDR.

Show the solution

Define both: each is a negotiable receipt issued by a depository bank against shares of an issuing company held with a custodian.
Market: an ADR is issued for and traded in the US market. A GDR is issued in one or more markets outside the issuer's home country and is not limited to the US.
Listing: ADRs trade on US exchanges, subject to US regulatory requirements. GDRs trade on exchanges such as London or Luxembourg.
Investors: ADRs target US investors. GDRs can reach investors in several countries at once.
Common features: the underlying shares stay with the custodian, dividends are paid in foreign currency and the company gets foreign capital without direct overseas listing of its shares.

Answer: Both are depository receipts. The main difference is that an ADR is for the US market, while a GDR is issued in other markets or in several markets together.

Example 2

A company issues a zero coupon bond of face value ₹1,000 at ₹621 (rounded), redeemable after 5 years. Find the approximate yield and state one advantage to the issuer.

Show the solution

Use Issue price = Redemption value ÷ (1 + r)ⁿ.
So (1 + r)⁵ = 1,000 ÷ 621 = 1.610 (approx).
From compound interest tables, 1.610 for 5 years corresponds to 10%, since 1.10⁵ = 1.6105.
So r = 10% (approx).
Advantage to the issuer: no periodic interest is paid, so cash outflow is deferred to maturity.

Answer: The yield is about 10% per year. The issuer saves cash during the bond's life.

Exam tips

Differentiation questions are common: prepare ADR vs GDR and ECB vs FCCB in point form.
For each instrument, learn one meaning line, two features, one advantage and one risk.
In securitization, draw the flow in words: originator, SPV, investors. It earns process marks.
Do not quote RBI limits or percentages unless the question gives them.
Use MCQ key words such as rupee-denominated, SPV and convertible to eliminate wrong options fast.

Practice questions from Types of Financing

Innovative and International Sources of Finance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Innovative and International Sources of Finance: frequently asked questions

What is the main difference between ADR and GDR?

An ADR is issued for the US market and trades on US exchanges. A GDR is issued outside the US or in more than one market. Both are receipts against shares held by a custodian.

Who bears the currency risk in a masala bond?

The investor does. The bond is issued abroad but denominated in Indian rupees, so the issuer repays in rupees and a falling rupee hurts the investor.

Why is the coupon on an FCCB usually low?

The bondholder also gets an option to convert the bond into shares. Investors accept a lower interest rate in return for that option, but the issuer faces dilution on conversion.

What is securitization in simple words?

It is converting a pool of loans or receivables into securities sold to investors. An SPV buys the pool and pays investors from the cash collected, so the originator gets funds sooner.